Disruptions in Banking and Automotive markets — same or different?
Banking and Automotive are the two large markets where long-standing champions and proven business models face a sudden threat from impudent challengers. Those challengers create significant hype in media and social networks and appear to be supported by millennial customers and sometimes regulators.
The two industries are frequently compared for the sake of projecting disruption trajectories from one into another and trying to predict what happens next in each of them. In this article, I analyze industry fundamentals, dynamics of technological changes and business models change in both markets to answer the key question — are those two industries’ disruptions comparable?
To be precise the comparison focuses on the Passenger Car market and Retail Banking market. The comparison is quite broad, therefore, certain simplifications and generalization were made to market outlooks.
Industry Fundamentals
When comparing the industry fundamentals, it becomes clear that Automotive and Banking are two very different industries.
Product type and differentiation, level and structure of competition, supply and distribution models, revenue and cost drivers, financial structure and performance — all of those are dramatically different. Automotive is an industry of high fixed assets and R&D costs, cyclical and highly differentiated products, long planning horizons and indirect distribution. Banking is a very specific service industry, with comprehensive portfolios of generally non-differentiable products, extremely high degree of competition and with the distribution network and brand power being the key differentiators (at least until recently).
The only important common factor between the two is a heavy and localized regulatory pressure, which has intensified in the last two decades. Banks face increasing capital adequacy and liquidity requirements, increasing anti-money laundering and KYC complexities combined with investment constraints. Automotive is pushed by regulators to decrease vehicle emissions with a new standard coming out every 4–5 years.
Both industries are facing two types of newcomer challengers: Product/Technology challengers like Revolut, N26, Monzo in Banking and Tesla, Faraday, Nio in automotive, and Business Model challengers like Funding Circle or Lending Club in Banking and Uber or Zipcar in mobility.
Product and Technology Challengers
Challengers of this type are trying to enter an established market by offering innovative product or technology.
Retail banks face product disruption from fintechs in areas like payments, lending, savings and investment. Market newcomers are normally featuring simplified products with simple online sign-up, great functionality and slick interface. A great example is Revolut offering simple stripped-down bank account+ card with better-than-market FX rates.
Automotive manufacturers are challenged by automotive start-ups offering all-electric, high-tech and futuristically designed alternatives to traditional cars. Tesla is clearly the most prominent example of a successful scale-up challenger.
What’s different?
New fintech ventures require much lower investments than setting up the mass car development and production, therefore, there much lower number of new entrants in Electric vehicles compared to Fintech.
Fintechs also scale up their customer base much quicker, due to (almost) zero sign-up cost (unlike electric cars) and the fact that while you sign-up with Revolut you can still keep your account with Lloyds, while keeping your old Audi while you buy a Tesla is frequently not economically viable.
Despite this, banks are frequently less threatened by fintechs than OEMs by Tesla, because of the differences in customer stickiness. Yes, there are much lower barriers to customer switching in Banking compared to Automotive, however, the switch is frequently only partial and is much more reversible, with many customers using services from traditional banks along with challengers. Frequently, customers switch to fintechs for low-margin payments products, but continue to use high-margin credit and investment functionalities from incumbent banks. In case of Automotive the traditional OEMs are losing customers slower, but more irreversibly, together with after-sales revenue streams.
Despite the lower scale-up speed, automotive challengers are more likely to reach profitability. Low product differentiation frequently forces neobanks to engage in price wars with incumbents and between themselves in order to gain scale fast. An attempt to increase price or decrease value proposition at later stage results in customers exodus. Electric cars OEMs on contrary can charge a premium for their innovative products which are being highly differentiated on the market. After-sales revenue stream also builds up with gaining scale. All of it make successfully scaling automotive challengers more likely to reach sustainability compared to neobanks.
What’s common?
Challengers waves in automotive and banking both started with the emergence of new technology in areas where traditional players were too slow and hesitant to react. However, in both markets the window of opportunities is closing down with incumbents catching up — OEMs come up with electric models and banks digitalize their offerings. The product and technology innovations brought by challengers are being quickly internalized by traditional providers closing down the gap. At the end of the day, only a few most successful challengers in both industries are going to remain afloat.
Business Model Challengers
Challengers of this type are trying to introduce a new business model, which is largely substitutional to an established market.
Banking faces emerging competition from P2P service providers in lending, which basically minimizes the role of middleman in-between lender and borrower, such as Finding Circle or Lending Club. The concept effectively allows borrowers to save on costs (sometimes) and lenders to increase return at the same time bearing the risks that would normally be absorbed by a bank.
On the contrary, automotive OEMs face an increasing threat to their sales volumes from the emerging mobility market comprised of ride-hailing and car-sharing.
What’s common?
In this case actually almost nothing.
What’s different?
The banking core business model remains largely unchanged for the last 500 years. Within the same timeframe, mobility business models managed to change several times.
And even nowadays there no real threats to the banking business model. Emerging business concepts such as P2P lending do not really threaten the mainstream customer flow, as they are targeted specifically at several narrow customer segments —e.g. lenders with excessive risk appetite and borrowers with low/no credit score. This business is going to remain niche, as the mainstream retail credit market will still require banks to absorb credit and liquidity risks for both lenders and borrowers.
At the same time, the rise of ride-hailing and car-sharing is driven by tectonic mainstream market shifts. Several intensifying forces, including increasing urban population density, tightening parking and city entrance regulations along with shifting customer preferences give a boost to shared mobility winning over traditional car ownership concept. Shared mobility business models will significantly influence the number of passenger cars sold in mid- to long-term. According to BCG research, shared mobility will result in 1.3% of lost car sales in Europe and 1.2% in Asia already as soon as in 2021.
The situation is difficult for both challengers and incumbents. Challengers require giant investments to gain viable scale — and turning scale into profitability remains unchartered waters for many scale-ups like Uber and Lyft. On the other side, automotive manufacturers struggle to internalize this new business model. They try to partner and invest into ride-hailing (Toyota/Uber and Lyft, GM/Lyft, VW/Gett) and develop their own car-sharing businesses (Daimler/Car2Go, BMW/Drive Now, Ford), in an attempt to hedge their bets, however, it is clear that this business is quite different from their core operations and success chances of this attempt are doubtful. There already cases of investment write-downs (Ford/Chariot, VW/Gett), and scale-back from certain cities (ReachNow in Seattle and Portland, Car2Go in Chicago and some other cities). When initial investment enthusiasm and cash-burning run for scale is over, it becomes clear that those adjacent businesses are not easy to set up and manage, especially for slow-moving car manufacturers.
[I am not touching the autonomous driving topic here, which has very little external disruption element to it and is still too far into the future, despite the hype]
Conclusion
The disruptive forces in Banking and Automotive markets are quite different with regard to industry fundamentals, disruption impact and incumbents' ability to successfully respond.
It is clear that in both industries Technology/Product innovations will be fully internalized by long-standing players. However, their short- to medium-term lag in internalization creates an opportunity for most successful challengers to gain a foothold in the industry. Anyway, banking revenue streams are much less affected by those disruptions compared to those of automotive manufacturers. At the same time, automotive contenders have much higher chances to reach sustainability compared to their banking vis-a-vis due to the profound differences in industry fundamentals and customer behaviors described above.
When it comes to the Business Model disruptions, the difference between the two industries is even more dramatic — banking is largely unaffected, while the automotive industry may experience profound changes including declining production numbers, diving after-sales revenues and a pressing need for traditional players to diversify into new and distant business models.
